1/15. The Supreme Court of the United States
(SCUS) issued its opinion
[33 pages in PDF] in Stoneridge Investment v. Scientific-Atlanta, a securities
fraud case involving stock in Charter Communications, a cable television
provider. At issue is the liability of secondary actors Scientific Atlanta and
Motorola, which sold set top boxes to Charter.

Introduction. Stoneridge's complaint alleges fraudulent financial
statements by Charter. But, it alleges no public fraudulent statements by
Scientific Atlanta or Motorola. The complaint merely alleges conduct by the two
in the form of contracts to sell set top boxes to, and to buy advertising from,
Charter. These contracts were not made public, and Scientific Atlanta's or
Motorola's own financial statements were not fraudulent.

The SCUS held that "the implied right of action does not reach the customer/supplier
companies because the investors did not rely upon their statements or representations."

This opinion limits the circumstances under which equipment vendors and other
third parties who do business with parties who do engage in securities fraud
can be held liable for securities fraud under Section 10b.

However, it does not exonerate all third parties who deal with those accused
of securities fraud. Scientific Atlanta and Motorola signed contracts with
Charter, and these were seen by Charter and its auditors. But, they were not
made public. Third party vendors, purchasers, and others might still be held
liable under Section 10b when they have made public fraudulent statements, when
they have breached a duty to disclose a material fact, and in other
circumstances addressed by the opinion of the SCUS.

Also, there are statutory sections other than 10b that might be applied to
third parties, such as accountants and underwriters.

There is also the matter of aiding and abetting liability. The SCUS held in its 1994
opinion in Central Bank of Denver v. First Interstate Bank of Denver,
reported at 511 U.S. 164, that there is no private right of action under Section
10b for aiding and abetting securities fraud.

Then, in 1995, the Congress enacted the Private Securities Litigation Reform
Act of 1995 (PSLRA). It did not add aiding and abetting liability under Section
10b in the PSLRA. Rather, the Congress amended the statute to it direct the
Securities and Exchange Commission (SEC) to
take action against aiders and abettors.

The just released opinion does nothing to limit the liability of third
parties who have aided and abetted securities fraud, but not committed
securities fraud themselves, in civil actions brought by the SEC.

This opinion is a defeat for class action securities lawyers.

Background. The plaintiff in the District Court and petitioner to the
SCUS is Stoneridge Investment Partners.

Charter Communications issued securities, and financial statements regarding those
securities, which actions give rise to the present litigation. It is a defendant in the
District Court. However, its liability is not at issue in the present SCUS proceeding.

Scientific Atlanta and Motorola did not issue the securities at issue. Rather, they were
equipment suppliers and then customers of Charter. Nevertheless, Charter named them as
defendants below. They are the respondents before the SCUS.

The SCUS offered a summary of the allegations in Stoneridge's
complaint regarding these two equipment suppliers. (Since the District Court
disposed of this issue on a Rule 12(b)(6) motion, the SCUS assumed the allegations in
the complaint to be true for the purposes of this certiorari proceeding.)

The SCUS wrote that "Charter arranged to overpay respondents
$20 for each set top box it purchased until the end of the year, with the
understanding that respondents would return the overpayment by purchasing
advertising from Charter. The transactions, it is alleged, had no economic
substance; but, because Charter would then record the advertising purchases as
revenue and capitalize its purchase of the set top boxes, in violation of
generally accepted accounting principles, the transactions would enable Charter
to fool its auditor into approving a financial statement showing it met
projected revenue and operating cash flow numbers. Respondents agreed to the
arrangement." Moreover, "the companies drafted documents to make
it appear the transactions were unrelated and conducted in the ordinary course
of business" and they "signed contracts with Charter to purchase advertising
time for a price higher than fair value", which contracts were backdated to make
the two transactions look unrelated". And all of this, Stoneridge alleged,
enabled Charter to report inflated revenue and operating cash flow in filings
with the SEC, which filings were also available to the public.

Scientific Atlanta and Motorola had no role in the preparation of Charter's
SEC filings. They properly reported the transactions in their own SEC filings.

District Court. Stoneridge filed a complaint in
U.S. District Court (EDMo) against
Charter, Scientific-Atlanta, Inc., Motorola, Inc., and others alleging
securities fraud in violation of Section 10b of the Securities and Exchange Act
of 1034, and rule 10b5 thereunder. Section 10b is codified at 15 U.S.C. § 78j(b).

Stoneridge alleged that Charter engaged in a pervasive and continuous
fraudulent scheme intended to artificially boost its reported financial results
by deliberately delaying the disconnecting of customers no longer paying their
bills, improperly capitalizing labor costs, and entering into sham transactions with the two
equipment vendors that improperly inflated Charter's reported operating revenues and cash flow.
Stoneridge alleged that the two equipment vendors conduct amounted securities fraud in
connection with transactions in Charter's securities.

The District Court dismissed the Section 10b claims against Scientific Atlanta and Motorola
pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. It
relied on the 1994 SCUS opinion in Central Bank of Denver. It reasoned that the
complaint did not allege that the equipment vendors made misstatements relied upon by the
public, or that they violated a duty to disclose.

Statute. Section 10b provides in part that it is "unlawful
for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of
any national securities exchange ... To use or employ, in connection with the
purchase or sale of any security ... any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the
protection of investors."

Section 10b does not expressly create a private right of action. However, the federal courts
have long held that there is a private right of action. (And, the SCUS wrote in this opinion
that in the PSLRA the "Congress thus ratified the implied right of action".)

Supreme Court. The
question presented
[PDF] to the SCUS is "Whether this Court’s decision in Central Bank, N.A. v.
First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for
deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c),
where Respondents engaged in transactions with a public corporation with no
legitimate business or economic purpose except to inflate artificially the
public corporation’s financial statements, but where Respondents themselves made
no public statements concerning those transactions."

The Supreme Court affirmed the judgment of the Court of Appeals. That is,
Scientific Atlanta and Motorola avoid liability in this securities fraud case.

Justice Antonin Kennedy wrote the opinion of the Court, in which Justices
Roberts, Scalia, Thomas, and Alito joined. Justice Stevens wrote a dissent, in
which Justices Ginsburg and Souter joined. Justice Breyer did not participate in
either this opinion, or the decision to grant certiorari.

Justice Kennedy wrote that "Reliance by the plaintiff upon the defendant’s
deceptive acts is an essential element of the §10(b) private cause of action."

He continued that "We have found a rebuttable presumption of reliance in two
different circumstances. First, if there is an omission of a material fact by
one with a duty to disclose, the investor to whom the duty was owed need not
provide specific proof of reliance. ... Second, under the fraud-on-the-market
doctrine, reliance is presumed when the statements at issue become public. The
public information is reflected in the market price of the security. Then it can
be assumed that an investor who buys or sells stock at the market price relies
upon the statement."

Kennedy wrote that "Neither presumption applies here. Respondents had no duty to
disclose; and their deceptive acts were not communicated to the public. No member of the
investing public had knowledge, either actual or presumed, of respondents’ deceptive acts
during the relevant times."

He also rejected the theory of scheme liability. Kennedy
characterized this as follows: "in an efficient market investors rely not only
upon the public statements relating to a security but also upon the transactions
those statements reflect". He reasoned that there is no authority for this, and
that were the SCUS to adopt this theory, then it "would reach the whole
marketplace in which the issuing company does business".

He also rejected any theory based upon common law fraud. "Section
10(b) does not incorporate common-law fraud into federal law."

He concluded, in light of the language of 10b, the SCUS's interpretation of
it in Central Bank of Denver, and the Congress's reaction in the PSLRA, that if
10b liability is to be extended to aiders and abettors, this is a job for the
Congress, not the SCUS.

He wrote: "Concerns with the judicial creation of a private
cause of action caution against its expansion. The decision to extend the cause
of action is for Congress, not for us. Though it remains the law, the §10(b)
private right should not be extended beyond its present boundaries."

Dissent. Justice Stevens wrote in his dissent that "Investors
relied on Charter's revenue statements in deciding whether to invest in Charter
and in doing so relied on respondents’ fraud, which was itself a ``deceptive
device´´ prohibited by §10(b)".

Solicitor General. The Department of Justice's
Office of the Solicitor General (OSG) argued in its
amicus
brief in this case that "Allowing liability for a primary violation
under the circumstances presented here would constitute a sweeping expansion of
the judicially inferred private right of action in Section 10(b) and Rule 10b-5,
potentially exposing customers, vendors, and other actors far removed from the
market to billions of dollars in liability when issuers of securities make
misstatements to the market."

This case is Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., et al.,
Sup. Ct. No. 06-43, a petition for writ of certiorari to the U.S. Court of Appeals for the 8th
Circuit, App. Ct. No. 05-1974. The Court of Appeals heard an appeal from the U.S. District
Court for the Eastern District of Missouri. See also, SCUS
docket.

1/16. MySpace, which is owned by News Corporation, and most state Attorneys
General entered into and released a
document
[12 pages in PDF] on January 14, 2008, titled "Joint Statement on Key Principles of
Social Networking Safety".

It acknowledges the benefits of social networking sites and MySpace's efforts
to improve online safety for minors. It provides for the creation of a task
force to study online identity management tools and other online safety tools.
The appendices, which come after the signatures, list numerous web site design
and functionality changes that MySpace has made, or plans to implement.

The document contains no call for state or federal legislation. No other
social networking service, and no federal agency is a party to the document.

The document states that "social networking sites are a powerful
communications tool that provides people with great social benefits".

It continues that MySpace "has implemented technologies and procedures to
help prevent children under 14 from using MySpace and to help protect minors age 14 and
above from exposure to inappropriate content and unwarranted contact by adults".

This document then enumerates many principles, and encourages other social
networking services to adopt them.

One principle pertains to online safety tools. The document states that
"Online safety tools, including online identity management technologies, are
important and must be robust and effective in creating a safer online
experience, and must meet the particular needs of individual Web sites."

Another principle pertains to web site design. It states that "Development of
effective Web site design and functionality improvements to protect children
from inappropriate adult contacts and content must be an ongoing effort."

Another principle pertains to education. It states that "Educating parents,
educators and children about safe and responsible social networking site use is
also a necessary part of a safe Internet experience for children."

Another principle pertains to law enforcement. It states that "Social
networking site operators and law enforcement officials must work together to
deter and prosecute criminals misusing the Internet."

Although, the document is silent on many aspects of the nature of this
cooperation. It contains nothing regarding data collection by social networking
site operators, data retention by social networking site operators, the data
that social networking site operators will provide to law enforcement, and pursuant to what
process or procedure.

This document is signed by the Attorney Generals of 49 states and the
District of Columbia. However, no federal agencies are a party to this document.

MySpace's Chief Security Officer Hemanshu Nigam stated in a
release that these
principles "set forth what the industry needs to strive towards to provide a
safer online experience for teens and we look forward to sharing our ongoing
safety innovations with other companies"

Adam Thierer of the
Progress and Freedom Foundation (PFF) stated in a
release
that "This partnership between MySpace and the Attorneys General, along with the
establishment of the Task Force, is a giant step forward in the right
direction. The principles in the agreement represent a model code of conduct
for the entire industry. Other social networking sites would be wise to adopt
similar policies and safeguards. I look forward to the coming year as industry
partners have the opportunity to transform their safety standards to what
MySpace has already done and continues to do."

The PFF released on January 16 a
paper [7 pages in PDF] by Thierer titled "The MySpace-AG Agreement: A Model Code of
Conduct for Social Networking?" that summarizes and analyzes the January 14 document.

2:30 - 4:30 PM. The Department of State's (DOS) International
Telecommunication Advisory Committee (ITAC) will hold a public meeting
to prepare advice for the U.S. on positions for the February 2008 meeting of
the working groups of the International Telecommunication Union Council. See,
notice in the Federal Register, December 31, 2007, Vol. 72, No. 249, at
Page 74402. Location: undislcosed.

2:00 - 4:00 PM. The Department of State's
(DOS) International
Telecommunication Advisory Committee (ITAC) will meet to prepare for advice for the
U.S. on positions for the February 2008 meeting of the Telecommunication Development Advisory
Group (TDAG) of the International Telecommunication Union (ITU-D). See,
notice in the Federal Register, December 19, 2007, Vol. 72, No. 243, at
Page 71992. Location: DOS Main, Room 5804, 2201 C St., NW.

2:00 PM. The
Senate Judiciary Committee (SJC) will hold a hearing on the nominations of
Kevin O’Connor (to be Associate Attorney General) and Gregory Katsas
(to be Assistant Attorney General in charge of the Civil Rights Division).
Location: Room 226, Dirksen Building.

Effective date of the Copyright Royalty Judges'
final regulations that set the rates and terms for the use of sound recordings in
transmissions made by new subscription services and for the making of ephemeral recordings
necessary for the facilitation of such transmissions for the period commencing from the
inception of the new subscription service through December 31, 2010. See,
notice in the Federal Register, December 20, 2007, Vol. 72, No. 244, at
Pages 72253-72256.

Extended deadline to submit reply comments to the
Federal Communications Commission (FCC) in
response to its Notice of Proposed Rulemaking (NPRM) regarding its program
access and retransmission consent rules and whether it may be appropriate
to preclude the practice of programmers to tie desired programming with
undesired programming. The FCC adopted this NPRM on September 11, 2007, and released the
text [144
pages in PDF] on October 1, 2007. It is FCC 07-169, in MB Docket No. 07-198. See also, story
titled "FCC Adopts R&O and NPRM Regarding Program Access Rules" in
TLJ Daily E-Mail
Alert No. 1,640, September 17, 2007. The original comments deadlines were
November 30 and December 17, 2007. See, original
notice in the Federal Register, October 31, 2007, Vol. 72, No. 210, at
Pages 61590-61603. See, also
notice of extended deadlines, Federal Register, December 28, 2007, Vol.
72, No. 248, at Pages 73744-73745.

Wednesday, January 23

The House is scheduled to be in session. See, Rep. Hoyer's
2008
calendar [4.25 MB PDF].

1/15. The U.S. Court of Appeals (7thCir) issued
its opinion in IFC Credit Corp. v. United Business and Industrial Federal Credit
Union, a case regarding a forum selection clause and jury waiver clause in
a contract
between a telecommunications equipment seller and purchaser.

The Court of Appeals wrote that a company named Norvergence,
which is no longer in business, "sold telecommunications equipment and services
-- or claimed to do so". It is not a party to this action. United Business and
Industrial Federal Credit Union (UBIFCU) is the defendant below and appellant in
this appeal. The Court of Appeals wrote that Norvergence "told lies to make the
sales" of telecom equipment to the UBIFCU.

IFC Credit Corporation now claims to be a holder in due course
of Norvergence's contracts. IFC seeks to collect payments on contracts for the
purchase of equipment and services that it never delivered. The Court of Appeals
wrote that if IFC has the status of holder in due course, "then personal
defenses that the customers could have asserted against Norvergence are
unavailable, and the customers must pay IFC" regardless of Norvergence's
wrongful conduct.

IFC is keen to enforce the forum selection and jury waiver
clauses in the contracts. It filed a complaint in U.S. District Court (NDIll)
against UBIFCU seeking to collect payments specified in the sales contract. The
District Court held that the jury waiver clause is unenforcable, and submitted
the case to the jury, which returned a verdict in favor of UBIFCU.

IFC brought the present appeal. The Court of Appeals reversed, and remanded with
directions hold a bench trial.

This is a complex opinion that addresses what law (state or federal) governs
forum selection clauses, unconscionable contract clauses, form contracts,
enforceability of forum selection clauses, enforceability of bench trial
clauses, and analogies to arbitration clauses.

This opinion also notes that it may be in conflict with other circuits. The
three judge panel therefore circulated this opinion to the full court

This case is IFC Credit Corporation v. United Business and Industrial Federal Credit
Union, U.S. Court of Appeals for the 7th Circuit, App. Ct. No. 07-1037, an appeal from the
U.S. District Court for the Northern District of Illinois, Eastern Division, D.C. No. 04 C
5905, Judge Matthew Kennelly presiding. Judge Frank Easterbrook wrote the opinion of the
Court of Appeals, in which Judges Flaum and Kanne joined.

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